Investors face a double whammy – tight budget plus a rate rise

Australians face an interest rate rise as early as next month after the Reserve Bank warned that a tough federal budget next week would not be enough to curb the inflation being driven by accelerating economic growth.

And it all comes as living costs soar to new heights.

Economists now believe the Reserve Bank will be forced to lift its official interest rates when its board meets next month, stirred into action earlier than expected because of runaway inflation.

Having kept rates on hold since November, the RBA released a surprisingly hawkish report on the state of the economy last week, highlighting the need to lift its inflation forecasts for the next two years.

It now expects underlying inflation to be above 3 per cent level by Christmas, one year earlier than it had predicted only two months ago. This puts the Reserve Bank in a difficult position.

Our economy is running at 2 speeds – while some sectors, particularly the resources sector, are performing well other sectors including retailing are suffering.

In a bid to rein in the surging cost of living, the bank has to raise interest rates and thus inflict more pain on household budgets and the weak sectors of the economy.


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